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Minister, is an IRA the Best Option for You? Retirement Alternatives

Question:

If I can make retirement contributions to both a Traditional IRA and to a church plan is there a reason to prefer one over the other?

Answer:

Yes! Most ministers should likely be choosing a 403(b) church plan.

In addition to a Traditional IRA, a minister may choose to claim a contribution to another retirement plan, like a 403(b) church plan. However, before choosing to do so, it is important to understand the benefits and disadvantages of both a Traditional IRA and a 403(b) plan.

Contributions to a Traditional Individual Retirement Account are not employer plans that are deducted up front from a minister's pay (reported on Form W-2). Instead, these amounts are truly deducted on his personal tax return. The benefit of the IRA is that it can be funded after December 31st and still count against one's taxable income. Additionally, an IRA does not require church sponsorship and has lower fees to establish an account.

While there are several benefits of an IRA, there are also some disadvantages. First, the annual contribution is limited to $6,000 per year (2019 level). Second, a required minimum distribution (RMD) is mandatory at the age of 70½ even if the pastor continues to serve full-time as an employee. Third, IRAs only reduce income tax, but do not reduce self-employment (SECA) tax.

Contributions to a 403(b) plan are made as “elective deferrals” from the minister's church compensation, then transmitted to a 403(b) investment account. The amount the minister elects to have withheld from his pay reduces his taxable employee compensation. Ministers over the age of 49 can contribute as much as $25,000 per year (2019 level). Internal Revenue Code 403(b) plans can also be established with employer matching benefits if the church is willing and able to afford the typically higher fees to establish such church plans. The amount withheld is not deducted again on his personal return since it was already subtracted from his income by his employer before preparing Form W-2.

For a minister as an employee who is subject to SECA tax, the elective deferrals reduce both income tax and SECA tax. However, unlike a Traditional IRA, a 403(b) plan can only be funded during the calendar year because it is a deduction from his paycheck. It is important to note an exception may exist for certain ministers (i.e. traveling evangelists) participating in a "solo 403(b)" which is beyond the scope of this post.

Unlike Traditional IRAs, post-retirement distributions from church-established 403(b) plans may be designated by the church as housing allowance (IRS Audit Technique Guides - Ministers). Also, unlike IRA accounts, ministers who postpone retirement and remain full-time employees by the church after age 70½ can delay receiving RMDs.


If you would like to discuss 403(b) church plan accounts, benefits, or contributions further, please contact us at info@ministrycpa.org.



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